Mandatory disclosure of EU cross-border tax planning arrangements

Update

The EU Council has announced that it has adopted the directive on mandatory disclosure of cross-border tax avoidance arrangements by intermediaries. The measure was adopted at a meeting of the Economic and Financial Affairs Council on 25 May 2018, without discussion. Member States have until 31 December 2019 to transpose it into national law.

The Final Version of the Directive (EU 2018/822) was published in the Official Journal on 05 June 2018 and so will come into force from 25 June 2018. As such, the transitional rules discussed below will apply in relation to any relevant cross-border arrangements the first step of which was implemented between 25 June 2018 and 01 July 2020.

For the UK's proposals to implement these measures see "UK consults on implementation of DAC 6"

The European Council has endorsed the EU Commission’s proposal to introduce mandatory disclosure and exchange of information in relation to cross-border tax planning arrangements. Under the Directive, to be implemented by 31 December 2019, Member States will need to require “intermediaries” (such as banks, accountants, lawyers) to report on certain cross-border tax planning arrangements, such that the Member State will be in a position to, and will be required to, exchange such information with other Member States.

Background

Action 12 of the OECD’s base erosion and profit shifting (BEPS) project recommended that jurisdictions should introduce a regime for the mandatory disclosure of aggressive tax planning arrangements. However, the report does not set minimum standards and does not require implementation. Nevertheless, the EU Commission and Member States regard disclosure of information on cross-border tax planning as consistent with the recent extension of tax transparency.

The proposed Directive, which will further amend the existing Directive on Administrative Cooperation (DAC), was first put forward by the EU Commission in June 2017. It builds on other recent tax transparency developments, including those requiring exchange of information concerning tax rulings and proposals for public disclosure of tax information on a country-by-country basis. It is also undoubtedly influenced by high-profile leaks, including the release of the Panama Papers.

The legal basis for the proposed Directive is Article 115 of the Treaty on the Functioning of the EU (TFEU) on the basis that lack of transparency facilitates the activities of intermediaries in promoting cross-border tax planning and, as a consequence, this distorts competition in favour of low tax jurisdictions and businesses which engage in such activities.

Agreed directive

The final form of the amended Directive will be introduced by amending the existing DAC to incorporate additional reporting and exchange obligations in relation to “potentially aggressive tax planning schemes with a cross-border element”.

The rules will apply to a “reportable cross-border arrangement”. A cross-border arrangement requires the arrangements to involve two or more Member States or a member state and a third country, ie wholly domestic arrangements will not be in scope (although may then be subject to national regimes such as the UK Disclosure of Tax Avoidance Schemes "DOTAS" rules). Such an arrangement will be “reportable” if it satisfies one of a range of “hallmarks” which are listed in the annex to the Directive. It is the hallmarks which are used, essentially, as a proxy for identifying “aggressive tax planning”. However, the term “arrangement” is not defined at all.

The Directive will require Member States to introduce rules to require “intermediaries” to provide information to the competent tax authority on a reportable cross-border tax arrangement within thirty days beginning on the earlier of:

• the day after the arrangement is made available for implementation
• the day after the arrangement is ready for implementation, or
• the first step of the arrangement occurs.

For these purposes, an “intermediary” means any person that “designs, markets, organises, makes available for implementation or manages the implementation” of a reportable cross-border arrangement. "Intermediaries" also covers any such person that “knows or could be reasonably expected to know that they have undertaken to provide, directly or by means of other persons, aid, assistance or advice with respect to designing, marketing, organising, making available for implementation or managing the implementation” of a reportable cross-border arrangement. However, only intermediaries that are incorporated, tax resident, registered with a professional association or have a permanent establishment in a member state are within the scope of the rules.

The most obvious intermediaries will, of course, by accountants, lawyers and other tax advisers involved in advising clients on their tax affairs. However, the definition goes wider and will catch any person involved in assisting or organising the arrangements, and may well apply to banks and other financial advisers. In particular, compared to the original June 2017 text, it is no longer a requirement that an intermediary be involved in the provision of tax advice in relation to the arrangements. Any lawyer or bank, for example, involved in the implementation of such arrangements will be an intermediary even if they have no involvement in advising on the tax aspects of the arrangements.

Where (as will often be the case) there is more than one intermediary involved, then in principle all intermediaries will have a reporting obligation, unless they can show that the relevant reporting obligation has been fulfilled by another intermediary.

The Directive provides that the obligation to report on a “cross-border reportable arrangement” will be moved to the taxpayer where either the intermediary is protected from disclosure by legal professional privilege or where there is no EU based intermediary involved in the transaction.

Where a member state receives information concerning a cross-border reportable arrangement from an intermediary or taxpayer, that member state will then need to exchange that information automatically with other Member States, including a range of details concerning the arrangements (such as summary of the arrangements, their value, identification of persons in other member state  involved, details of the hallmarks, implementation dates etc). Note that exchange will be with all other Member States, rather than just those implicated in the reportable cross-border arrangement in respect of which disclosure has been made. It is intended that the Commission will set up a “central directory” where the information can be communicated to satisfy this requirement.

In the case of “marketable arrangements”, Member States must require a periodic report from intermediaries every three months providing an update on the reportable information.

Member States are required to provide for penalties that are “effective, proportionate and dissuasive” for failure to comply with reporting obligations under the domestic implementation of the Directive.

Hallmarks

Whilst the introduction to the proposed Directive states that the measures are aimed at “aggressive” cross-border tax planning arrangements, that expression is not used in the wording of the legislation at all. Instead, the Directive seeks to use a series of hallmarks to identify the arrangements concerned. These hallmarks fall into two groups:

• Arrangements which must satisfy the main benefit test and have a generic hallmark or specific hallmark linked to the main benefit test:
  • the generic hallmarks include the inclusion of a confidentiality condition relating to the tax advantage, a fee based on the tax advantage or the use of standard form documentation
  • the specific hallmarks include loss buying arrangements, converting income to capital, circular transactions and arrangements involving deductible cross-border payments between associated entities where the recipient is substantially untaxed.

In either case the main benefit test will be satisfied where it can be established that “the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage”. It might be noted that “tax advantage” is undefined and there is no legislative requirement that the advantage be one that is not one intended to be conferred on a taxpayer.

• Arrangements which have specific hallmarks related to cross-border transactions, transfer pricing or which seek to circumvent automatic exchange of information in the EU, including:
  • arrangements involving the availability of depreciation in more than one jurisdiction, multiple claims for double tax relief on the same income and transfers of assets where there is a material difference in the amount treated as consideration
  • transfer pricing arrangements involving the use of unilateral safe harbour rules, involving hard-to-value intangibles or involving a cross-border transfer of functions/risks/assets where the projected annual Earnings Before Interest and Taxes (EBIT) for the following three years is less than 50% of the projected annual EBIT in the absence of such a transfer, and
  • arrangements to undermine reporting obligations under EU law or equivalent arrangements on automatic exchange or which take advantage of the absence of such legislation or agreements as well as arrangements broadly involving “a non-transparent legal or beneficial ownership chain”.

In this second category of hallmarks, the arrangements do not also need to meet the main benefit test.

It should also be noted that the DAC does not, and therefore the new rules will not, apply to value added tax, customs duties, excise duties or to compulsory social security contributions.

Transitional rules

Whilst the rules are only forward looking in the sense that existing tax planning arrangements in place now are not affected, the Directive does contain a transitional regime. Under these transitional rules, any cross-border arrangements the first step of which was implemented between the date of entry into force of the Directive (25 June 2018) and the date of application of the Directive (01 July 2020) (when the full rules must be implemented) must be disclosed by 31 August 2020.

Therefore, although the first notifications are not due until August 2020, these notifications will have to cover the period from the entry into force of the Directive (25 June 2018) onwards. Taxpayers and intermediaries therefore have to consider now how they will track relevant arrangements to enable them to file these notifications. This may prove problematic in the absence of national implementing legislation. In particular, in the absence of domestic legislation or guidance, it will not be possible to know how widely national tax authorities will intend to interpret the rules.

Comment

As with the UK’s existing DOTAS rules, the proposed EU Directive does not seek to address the effectiveness or otherwise of any underlying tax planning, but simply seeks to require disclosure and exchange of information concerning reportable cross-border arrangements. Member States will obtain early warning on new risks of avoidance, enabling them to take measures to block harmful arrangements. Member States will be obliged to implement penalties for those companies that do not comply with the measures.

However, the scope of the Directive is very wide. In particular, the hallmarks are, in some cases, so wide as to cover any type of tax planning, the transfer pricing hallmarks being particularly notable in this regard (even though they are more narrow than the June 2017 draft). These are also notable in requiring, in principle, advisers to take a view on the projected financial implications of the arrangements.

Equally, whilst the generic and certain specific hallmarks require the “main benefit test” to be met, that is in itself not an onerous test and there is no exception for tax planning that is encouraged by national legislation, for example where specific reliefs or exemptions might have been made available for particular types of income or activity. In this context, hallmarks concerning the use of standardised documentation would appear to be very wide indeed.

Not only that, but the requirement for the intermediary to have been involved in the tax aspects of the arrangements has now been removed. As such, even intermediaries such as lawyers and banks who are not responsible for the design of the arrangements will be subject to reporting obligations unless they can show that it was unreasonable for them to be aware that the arrangements were reportable.

The Directive will now be put forward for formal adoption by the EU Council and will enter into force on the twentieth day following its publication in the Official Journal. Member States must transpose the amendments into domestic law by 31 December 2019. It is to be hoped that Member States implement the rules in a sensible manner and that local tax authorities issue guidance to clarify how they will apply some of the very wide aspects of these rules in practice.